[TheForge] OT--Gas prices, gas shortages, price gouging?

[Rob Fertner]

Here's the best explanation of gas pricing I've heard yet. I got this off a
blog by a guy named Rich Hailey.
http://shotsacrossthebow.com/archives/003044.html#003044


Gas Prices: The Real Story
It's amazing what you can learn if you just ask a question or two instead of
assuming you already know the answer.

Why are gas prices spiking today?

Gouging, right? It's the evil big oil companies ripping us off again!

Actually, no, it isn't.

I stopped in at a few gas stations, some chain and some independent to see
exactly what was going on. I got pretty much the same story from both sides,
with some slight differences. Basically, what has happened is that the slide
in crude prices combined with the supply interruptions from Gustav and now
Ike, have combined to create a shortage of bulk fuel in Tennessee, and that
means the retail outlets are running dry.

Here's how it worked. The Knoxville area has several bulk fuel storage
depots. Some belong to the chain outfits, others are run by wholesalers that
supply independent gas stations. In either case, they manage their storage
levels to maintain a competitive retail price. When the price of gas is
rising, they maintain a relatively full inventory. This means that on
average the gas they store always costs less than the current spot price. On
the other hand, when gas prices are dropping, they keep inventories low, so
they aren't holding a lot of gas that cost them more than the market price.

It's the exact same thing you do to minimize how much you pay for gas. If
the price is going up, you fill up in the morning before the price changes
go into effect, and you fill the tank full. When the price is going down,
you guy your gas in the afternoon, after the price changes, and you buy just
what you need. The wholesalers and bulk storage facilities do exactly the
same thing, except on a much larger scale. Gas prices have been plummeting
lately, so all of the bulk storage facilities have been keeping their stocks
low.

Then along came Gustav, which impacted the ability of refineries to deliver
fuel to the regional and local bulk storage facilities. That hasn't been a
huge deal because they were drawing down their stocks anyway. But now Ike is
headed for Galveston, and the pipelines are being shut down completely. And
that is where the fertilizer hits the propeller. When you're in a low stock
condition, you are relying on a steady flow of gasoline to maintain smooth
distribution. When that steady flow is disrupted, you're only hours away
from shortages.

It's been more than a few hours, and shortages are already here.

So the price of a gallon of gas is skyrocketing, even at stations, like
Pilot, that have enough gas to get through the interruption without going
dry. So why are they raising their prices? Aren't they gouging?

Nope. If you've been out in Knoxville at all today, you've seen long lines
of cars at gas stations. You've seen people filling up cars, trucks,
motorcycles, lawnmowers and gas cans. They are in a panic mode, and they're
buying more gas than usual. Even though Pilot has enough to get through the
crisis at normal levels of sales, there's no way they can sustain sales at
the rate they are going. So what do they do? They raise prices. By raising
prices, they discourage people with brains from buying more gas than they
need. They discourage people from driving more than they need to. In effect,
they are encouraging conservation by using market forces rather than
governmental coercion.

And it will work.

Consider the opposite case, where gas prices remain low, and everybody fills
every container they can get their hands on with gas, and the stations run
dry for the next three days. What happens when an ambulance needs to gas up?
What happens when a fire truck needs fueling? What happens when you have an
emergency and you need fuel but can't get any because everybody and his
brother is hoarding it?

There are two ways to ration a short supply of a commodity. You allow the
market to price it accordingly, and those who really need it will buy it, or
you let the government come in and set the price. As a small government
supporter, I favor the former. We're still dealing with the fallout of
Nixon's wage and price controls from 40 years ago.

Anyway, that's what happened. Bulk storage facilities were acting to
minimize the price of fuel and got caught short when the supply was
interrupted. Barring major damage from Ike, supplies should be flowing again
in a couple of days, and prices will resume their freefall.



-----Original Message-----
From: theforge-bounces at mailman.qth.net
[mailto:theforge-bounces at mailman.qth.net] On Behalf Of Jonathan Barnhart
Sent: Saturday, September 13, 2008 11:24 AM
To: The Forge
Subject: Re: [TheForge] OT--Gas prices, gas shortages, price gouging?

Well, with everyone buying, it wasn't just the price increases, it was the
fact that the pumps were running very low to empty because too many idiots
started buying and filling up their tanks as well as gas cans.  Add to that,
nobody knew when or if the next shipments were coming in.


      
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